Stocks Reach Record Highs as Fed Policy Update Looms07-09-2019 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 07/05/19. Rates and Economic Calendar Data from Bloomberg as of 07/05/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets finished higher during the holiday shortened week of trading. In the U.S., the S&P 500 Index, Dow Jones Industrial Average, and NASDAQ Composite gained 1.69%, 1.27%, and 1.96% respectively. Overseas, developed and emerging markets, as measured by the MSCI EAFE and MSCI Emerging Market Indexes, advanced 0.52% and 0.69% respectively. Over in fixed income, the 10 year U.S. Treasury yield fell as low as 1.94% before finishing the week 10 basis points higher at 2.04%.
Despite the short work week, there were some noteworthy political and economic updates. To kick off the week, stocks were lifted on optimistic trade and tariff news between the U.S. and China. The two countries agreed to hold off on additional tariffs and it was reported that the two sides were “back on track” with respect to trade talk negotiations. On Monday we also received some positive, although not necessarily strong, news coming out of manufacturing. June manufacturing PMI topped expectations and May’s PMI was revised higher than initially reported. On Wednesday, major averages in the U.S. continued their ascent, setting all-time highs for the third consecutive day. Stocks finally cooled off on Friday as data showed nonfarm payrolls increased by 224,000 jobs in June, more than expected and a rebound from the lackluster 72,000 jobs increase in May.
The reason for the lack of market support to such strong numbers is, of course, that the news dampened hopes for a July rate cut by the Federal Reserve (“Fed”). The probability of a July rate cut is still around 93% and overall, despite the market’s reaction, we’re pleased that the data provided validation that the economy is still growing, albeit at a slower pace, instead of having two consecutive months of disappointing data, perhaps suggesting that economic growth had run its course.
This week we have a few important updates relating to the Federal Reserve. On Wednesday, the Fed will be releasing its June meeting minutes while Chairman Jerome Powell is also set to testify before Congress for his semi-annual monetary policy report. In addition, investors will look to Thursday’s Consumer Price Index data to see if the trend of low inflation continues. One rate cut appears to be priced into the market so these events may help confirm or even shape investor’s expectations on future moves by the Federal Reserve amid conflicting data (e.g. strong job numbers yet a slowing economy) and determine if there’s a general belief that such moves will be supportive of additional stock market appreciation potential.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.